Simple Mutual Fund Definition

A mutual fund is a type of investment fund that is managed by professionals and combines the capital contributed by numerous individuals in order to buy securities. Generally speaking, the term is used in the United States, Canada, and India. However, the SICAV in Europe (which stands for “investment company with variable capital”) and the open-ended investment company (OEIC) in the UK are both similar structures that can be found in other parts of the world.

The primary investments of mutual funds are sometimes used to categorise the funds into one of four different types: money market funds, bond or fixed income funds, stock or equity funds, or hybrid funds. The performance of an index, such as a stock market index or a bond market index, can be tracked by index funds, which are managed in a passive manner and charge lower fees than actively managed funds. Actively managed funds, on the other hand, aim to outperform stock market indices but typically have higher management costs. Open-end funds, closed-end funds, and unit investment trusts are the primary organisational forms utilised by mutual funds.

Open-end funds are bought from the issuer or sold to the issuer at the net asset value of each share as of the close of trade on the trading day in which the order was placed, provided that the order was placed within a certain length of time before trading was terminated. They are able to be traded directly with the entity that issued them.

When opposed to investing directly in individual stocks, investing in mutual funds comes with both advantages and disadvantages. Economies of scale, diversity, liquidity, and expert management are some of the benefits that come along with investing in mutual funds. However, these come with fees and expenses associated with mutual funds.

Governmental authorities are in charge of regulating mutual funds, and these funds are required to publish a variety of information, including their performance, a comparison of their performance to that of benchmarks, the fees they charge, and the securities they hold. It is possible for a single mutual fund to have many share classes, with larger investors paying lower fees for each class.

The categorization of funds according to the many underlying investments

It is possible to categorise mutual funds according to the primary investments they hold, as outlined in the fund’s prospectus and investment objective. The money market, bond or fixed-income, stock or equity, and hybrid funds are the four primary types of funds that are available. Funds can be sub-classified further under these categories according to their investment objectives, investing strategies, or particular areas of specialisation.

Money market funds

Money market funds are investment vehicles that put their money into money market instruments, which are fixed income securities that have a very short time until they mature and a high credit quality. Even though money market funds, unlike bank savings accounts, are not insured by the government, investors frequently use them as an alternative to savings accounts at banks.

It is possible for money market funds that are sold to retail investors in the United States and those that invest in government securities to keep their net asset value per share at a stable $1 when the funds comply with certain conditions. These conditions include: Money market funds that are sold to institutional investors and that invest in non-government securities are required to compute a net asset value based on the value of the securities that are held in the funds. These funds are also referred to as money market mutual funds.

Bond funds

Bond funds are mutual funds that invest in fixed income securities or debt instruments. The following criteria can be used to further divide bond funds:

• The particular kinds of bonds that are held (such as high-yield or junk bonds, investment-grade corporate bonds, government bonds or municipal bonds)
• The age of the bonds that were purchased (i.e., short-, intermediate- or long-term)
• The nation from which the bonds were initially issued (such as the U.S., emerging market or global)
• The manner in which any interest earned is to be taxed (taxable or tax-exempt)

At the end of 2019, the total assets held by bond funds (of any form) in the United States totaled $5.7 trillion, representing 22 percent of the industry as a whole.

Stock funds

Common stocks are the assets that are held by stock and equity funds. It’s possible for stock funds to zero in on a specific sector of the stock market, like technology or healthcare, for example.

• stocks originating only from a particular industry
• equities originating from a particular nation or region
• the stocks of businesses that are undergoing rapid expansion
• The portfolio managers will only invest in stocks that they believe offer a decent value in comparison to the worth of the company’s business.
• dividend-paying stocks that can be used as a source of income
• stocks that fall inside a specific range of market capitalization

At the close of 2019, assets in stock funds (of all types) totaled $15.0 trillion in the United States, representing 58 percent of the sector as a whole.

Hybrid funding

The investments of hybrid funds might include both fixed-income and equity markets, as well as convertible securities. There are a number of different types of hybrid funds, including balanced funds, asset allocation funds, convertible bond funds, target date or target-risk funds, lifecycle or lifestyle funds, and funds. A mix of stock factors (such as the Fama–French three-factor model), bond factors (such as the excess returns of a government bond index), option factors (such as implied stock-market volatility), and fund factors can be used to explain the performance of hybrid funds (e.g., the net supply of convertible bonds).

There is also the possibility that hybrid funds will be organised as a fund of funds, which would mean that they would invest by purchasing shares of other mutual funds that also invest in equities. Although the majority of funds of funds make investments in connected funds, which are mutual funds managed by the same fund sponsor, some funds make investments in unaffiliated funds, which are managed by other fund sponsors, or some combination of the two types of funds.

Conclusion 

Mutual funds are professionally managed investment funds that pool the money of many investors to buy securities. Us, Canada, and India use the word. SICAV in Europe and OEIC in the UK are comparable structures present in other regions of the world.

Money market funds, bond or fixed income funds, stock or equity funds, and hybrid funds are categorised by their major investments. Index funds, which are passively managed and incur lower fees than actively managed funds, can track an index’s performance. Actively managed funds try to outperform market indices but have higher fees. Mutual funds can be open-end, closed-end, or unit investment trusts.